How to calculate franchise royalties
A problem-to-playbook guide to getting royalties right - from defining the revenue basis to applying the rate and accruing the result without double-booking.
Step one: define the revenue basis
Every royalty dispute starts with the basis. Is it gross sales? Net of refunds? Excluding tax? The franchise agreement defines it, and your calculation has to match. The cleanest basis is the location’s actual invoiced revenue for the period - real, non-void, non-draft invoices - because it’s verifiable on both sides.
Nail down the basis
- What the agreement counts as royalty-bearing revenue
- The period (usually a calendar month)
- Exclusions (voids, drafts, certain categories)
- Whether a minimum royalty applies
Step two: apply the rate and any minimum
Royalty with a floor
royalty = max(revenue_basis × royalty_pct, min_royalty)
The rate is the location’s override if set, otherwise the franchise default. A minimum royalty protects the franchisor on low-revenue months.
Step three: accrue and report
From calculation to collectible
- 1
Compute a preview
Calculate each location’s royalty for the period without persisting anything.
- 2
Accrue to the ledger
Post the royalties for the period; make the accrual idempotent so re-running won’t double-book.
- 3
Invoice and collect
Bill the franchisee, then track the royalty through invoiced and paid.
How Fintra automates it
Fintra derives the revenue basis from each location’s own invoices, resolves the effective rate (override or default), applies any minimum, and accrues idempotently - so the royalty run is a review, not a monthly recalculation, and the number is defensible to the franchisee.
Frequently asked questions
How do you calculate a franchise royalty?
Multiply the royalty-bearing revenue basis for the period by the royalty percentage, and apply any minimum royalty. The basis is defined by the franchise agreement - commonly the location’s invoiced revenue excluding voids and drafts - and the rate may be a location-specific override or the franchise default.
What is the royalty revenue basis?
It’s the amount of a location’s revenue that royalties are charged on, as defined in the franchise agreement. Using the location’s actual invoiced revenue for the period (excluding voids and drafts) gives a basis that’s verifiable by both the franchisor and the franchisee.
How does a minimum royalty work?
A minimum royalty is a floor: the franchisee owes the greater of the percentage-based royalty or the minimum. It protects the franchisor when a location’s revenue is low. Fintra computes royalty as the maximum of the rate-based amount and the minimum, and flags when the floor applied.
How do you avoid double-booking royalties?
Make the accrual idempotent per location and period, so re-running a month as late invoices land doesn’t post the royalty twice. Fintra’s royalty accrual is idempotent by design, which makes the run safe to repeat.
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